Tensions run high as Seattleites argue Sodo arena plan

By NICK EATON, SEATTLEPI.COM STAFF

Updated 12:27 pm, Wednesday, July 11, 2012

Chris Hansen smiles as he speaks to supporters of his proposal for a new arena during a rally Thursday, June 14, 2012, in Seattle.

Chris Hansen smiles as he speaks to supporters of his proposal for...

Seattle Mayor Mike McGinn, center, speaks to media as arena investor Chris Hansen, second from left, and King County Executive Dow Constantine, fourth from right, look on Wednesday, May 16, 2012, in downtown Seattle during a news conference on a formal agreement for construction of a new multipurpose sports arena in the Sodo neighborhood.

Photo: Joshua Trujillo

Seattle Mayor Mike McGinn, center, speaks to media as arena...

Arena investor Chris Hansen listens during a press conference announcing a memorandum of understanding on financing of a new NBA and NHL arena in Seattle. The memorandum is between the owners of the new arena and local government. The event was held on Wednesday, May 16, 2012 at King County's Chinook Building.

Photo: JOSHUA TRUJILLO

Arena investor Chris Hansen listens during a press conference...

This July 23, 2011, file photo shows Microsoft CEO Steve Ballmer cheering during a charity basketball game in Seattle. The push to build a new arena in Seattle with the hopes of seeing the NBA return now has another name to go along with that of hedge-fund manager Chris Hansen. Ballmer will be part of the investment group for both the arena and the acquisition of an NBA franchise, according to a letter sent Wednesday, June 13, 2012, by Hansen to King County Executive Dow Constantine and Seattle Mayor Mike McGinn. A copy of the letter was obtained by The Associated Press.

Photo: Ted S. Warren

This July 23, 2011, file photo shows Microsoft CEO Steve Ballmer...

Bring Back Our Sonics co-founders David Brown, center, and Jeff Brown, left, present T-shirts to Seattle native Chris Hansen, who is leading a group of investors to bring a NBA and NHL team to Seattle. Hansen spoke before the Arena Review Panel on Wednesday, March 7, 2012, at Seattle City Hall.

There was a time, just a few months ago, when it looked like the proposed Sodo arena could sail through the approval process. Seattle Mayor Mike McGinn and King County Executive Dow Constantine got on board, basketball fans lept with excitement, and the sports-talk radio hosts gabbed about how great of a deal this plan was for the city.

It looked like Chris Hansen, the San Francisco investor who wants to bring the Sonics back to his hometown, would have little trouble moving his plan forward.

Oh how wrong we all were.

First came the doubts about Sodo traffic from the Mariners, the port and the shipping industry. Then came the City Council's concern about the risks of public investment. Then came the Seattle Times' official opposition to the deal.

It all came to a head -- or, more likely, started coming to a head -- Tuesday evening at North Seattle Community College, where City Councilmember Mike O'Brien and County Councilmember Bob Ferguson held a "town hall" community meeting on the proposed multipurpose sports arena south of Safeco Field. They started off asking the 200 or so people in attendence to be respectful and to let everyone speak their mind in peace.

Ha.

Once people started asking questions about the proposal, the meeting quickly devolved into a heckling contest: the proponents versus the opponents and skeptics. Or, as some who were there might say, the Sonics fans versus the port supporters -- and the old people.

One guy in the back of the room called out his "elderly neighbors" for being scared of progress. One woman sent the NSCC cafeteria into near hysteria when she likened the proposal to "blackmail." Someone else, decked out in green and gold, rebutted by saying the Port of Seattle is the one blackmailing the citizens.

What we need, Ferguson reiterated time and time again, is hard data about the effects of a new arena in Sodo. Would it really clog the streets so bad that the port would lose business? Would it make KeyArena and its employees obsolete?

Would the city and the county, which are being asked to loan $200 million for construction, be adequately protected from financial risks? Would the plan even be legal under Initiative 91, the 2006 ballot item that limited public support of for-profit sports teams?

These are the key issues the city and county councils must consider, now that they are tasked to approve or reject a financing agreement among Hansen, McGinn and Constantine -- and are under pressure to make a decision by the end of August.

"That's the analysis that we're doing, and I think what the citizens expect us to do is a careful analysis of those impacts," said Ferguson, who is running this year for state Attorney General. "And frankly, at least in my perspective as an elected official, I hear things on both sides.

"I think it's important for us to get actual data that we can use so it's not guessworking, it's not who's talking the loudest -- but actually based on actual data."

Financing an arena under I-91

Tensions are also mounting on the Chris Hansen side of things. On Monday, he wrote a blog post on his SonicsArena.com website blasting a report by the City Council's Central Staff that was unsure the proposal meshes with I-91.

He said the report, released last week, used "unfounded" assumptions, he urged "simple common sense" and he said the City Staff made a "very basic finance mistake" in its estimate.

"The bottom line here is that any way you cut it, our proposal meets I-91 – both the definition and intent," Hansen wrote.

Here's the deal.

Hansen had been working behind the scenes with McGinn's office for nearly a year on a plan that could bring the NBA back to town -- and potentially the NHL. Once the conversation went public, it only took a few months for the city and county to announce a "memorandum of understanding" that spells out a proposed structure for the government's involvement with building a $490 million arena.

Under the agreement, the city and county would contribute $200 million total, obtained via bonds, to the arena project if Hansen can nail down both an NBA and NHL team. The city's share is $120 million; the county's is $80 million.

Of that total, $100 million is set aside to purchase the land -- which Hansen already owns and has estimated is worth around $50 million -- at the land's appraised value, whatever that ends up being. The remainder of that $200 million would go to purchasing the arena building once it's built, about two years later.

That's one scenario. If only an NBA team is involved, the city would contribute $115 million and the county would front just $5 million. The arena would still be built, with the extra cost being made up by Hansen's investment group. And the arena would still be capable of hosting professional hockey if Seattle eventually got an NHL team.

This makes for two 30-year public bonds: one for buying the land and one for buying the arena about two years later.

Over those 32 years, the bonds would be paid back by taxes on arena operations -- mainly through admissions and B&O taxes -- and by $2 million in annual rent from Hansen's group. If the taxes and base rent don't add up to the city and county's required annual bond payment, Hansen has pledged to make up the difference by paying extra rent.

Any annual surplusses would go to a public reserve fund for improvements to the arena, and eventually -- potentially -- into the general fund, where the city and county's revenue could be used for civic projects.

Because the plan doesn't require any new taxes on the general public, McGinn has been calling the arena "self-funded." Those semantics may be up for debate, but there's an even larger question: Does the proposal comply with Seattle's I-91?

That's what the City Council's finance committee has been grappling over the past three weeks. At hearings, they've heard from representatives of the City Budget Office and the council's own Central Staff. And those offices have arrived at different conclusions.

The budget office says yes, the proposal complies with I-91, which requires any public investment in a pro sports arena to return "fair value" to the city. In other words, the city must be guaranteed that any arena investment isn't high-risk. Some reports through the years have said I-91 requires an arena deal to be profitable for the city, but that's an oversimplification.

The Central Staff says it's not entirely sure the deal complies with I-91. The initiative, now law, says "fair value" should be defined as the rate of return of a U.S. Treasury bond, which is currently around 2.7 percent annually. The problem lies in that definition of "fair value": that the city's "cash on cash" return must be at least equal to a Treasury bond's rate of return.

So, when read literally, I-91 only applies to cash investments. But in the proposed arena deal, the city and county would be using their debt capacity, not cash.

As such, the City Council could rule that I-91 doesn't apply to the arena proposal, and they'd be technically correct. But no one involved seems to be interested in sidestepping the voice of the voters; the mayor, the council and even Hansen want to honor the intent and spirit of I-91, which aims to protect taxpayers as much as possible from financial risk.

So the council likely will devise a test to see whether the plan complies with I-91, by substituting the "cash on cash" requirement with something else. The City Budget Office and the Central Staff drew out their own alternatives, and while the budget office found the proposal is in compliance, the Central Staff recommended adding some sort of "risk premium" to better protect the public.

Hansen, of course, says the proposal exceeds the requirements of I-91, particularly since the city and county will own the land in Sodo. That's fair value right there, Hansen says -- let alone his estimate that the public would get at least a 7 percent annual rate of return on its investment.

It's all complicated stuff. Financial mumbo-jumbo. The bottom line is that the city and Hansen will continue to negotiate, potentially amending the agreement, until all parties are happy -- or until the deal falls through completely.

'I don't believe in absolutes'

Meanwhile, The Seattle Times has not been alone in arguing that if a bunch of rich guys want to build an arena and own an NBA team, they should finance it all themselves. Surely Hansen and his investment partners, including Microsoft CEO Steve Ballmer and two members of the Nordstrom family, have the means to shell out the $120 million minimum public investment as called for in the proposal.

Hansen has explained to the City Council that with the way such big business deals work, building an arena is not feasible without public support. For a project of such scale, he needs the city and county's arena taxes to help pay off the money borrowed for construction.

However, that's not likely to convince everyone. On Tuesday, while trying to speak over the jeering Sonics supporters at the town-hall meeting, one attendee said a "sports palace" should be funded entirely privately.

"There is a perspective, right, that there should be -- and it's one I don't happen to share -- that there should never be any public involvement of any amount for a proposed sports stadium," County Councilman Ferguson responded. "From my perspective, I guess I don't believe in absolutes in this sort of thing. What I believe is: Take each issue, take it on its merits and analyze it."

This proposal is different from the one years ago, when Sonics owner Howard Schultz asked for public financing to renovate KeyArena once again, just a decade after the previous overhaul. Seattle balked at that plan, and it eventually led to I-91 and the Sonics' departure to Oklahoma City.

Supporters say the deal is too good to pass up. Hansen's investment group is willing to put up $800 million for arena construction and for acquiring an NBA team. And the city and county are guaranteed, under the agreement, to break even on the financing, and end up with property worth at least $50 million, and likely much more.

"I don't care how you slice it, that's a big investment," Ferguson said of the private contribution.

"I'm very sympathetic to the perspective that, why is the public involved in any professional sports?" City Councilman O'Brien said. "It's certainly frustrating to me. And I wish that there were a different reality than that. But when I look around the country, it's pretty clear to me that in today's environment, because of the competitive nature between cities, that just about every professional sports team involves some sort of public investment.

"I think what we're trying to do is get to a place where we can craft a deal that brings the benefits of professional sports -- and I think we can all agree there's some benefit, maybe not to any of us personally but to the community as a whole -- but do it in a way that benefits all of us, and with broad community support."

Three major perspectives

Some questions have yet to be answered. Though Hansen commissioned an independent study that found extra arena traffic would have minimal impact on the shipping industry, the city will continue to study that, as it's a major concern regarding the local economy. And while Hansen's agreement with the city and county includes devising a plan for the future of KeyArena, that has yet to be determined.

But among everyday Seattleites, O'Brien said, he has noticed three major perspectives in the thousands of emails he's received from constituents on the topic of the proposed arena. There's a camp that wants the Sonics back no matter what, there's a camp that's still bitter about the Sonics' departure and wants nothing to do with the NBA again, and there's a camp that thinks the public's money would be better spent on other things.

"There's a group that says, look, there are other needs in the city," O'Brien said after the meeting Tuesday. "We've got potholes. The schools need some investing. Our parks department is under pressure. You know, all the areas. More public safety. We don't want you diverting resources to this arena that could be spent elsewhere.

"And it's those people that I'm trying to find a deal that's gonna work for them. To convince folks ... that this isn't diverting, in fact it may add some resources to that. It's not going to get in the way of other investments we want to make. And we've got enough protections in place that we're confident we can move forward."

Getting everyone to agree is a huge challenge, and probably an impossible one. But disagreement doesn't mean there can't be collaboration, Ferguson said. In fact, the proposed arena could be an opportunity for groups like the port, for instance, to finally see some of the changes they've been requesting for decades, he said.

Seattleites will get another chance to voice their opinions on July 19, when the city and county councils hold a joint arena hearing at 5:30 p.m. at City Hall. And rest assured, there will be plenty of opinions to be heard.